Most companies are unaware closing a defined benefits (DB)pension scheme is not enough to avoid a Pensions Protection Fund (PPF) levy, warns First Actuarial.
The PPF levy was introduced just six months ago, but has already come under criticism for causing final salary schemes to close. But First Actuarial suggests this won’t actually help a company’s cash flow, as it will still have to pay the “insurance premium” of a PPF levy while covering the costs of setting up and contributing to a new pension scheme.
Alan Smith, director of First Actuarial says: “It doesn’t seem to have sunk in with most people that just closing a DB scheme won’t stop the levy. If the company goes into liquidation and there’s not enough money to pay the benefits promised, then the PPF has to take over, so companies will still continue to pay the annual charge until the scheme is wound up.
"We have done assessments for some of our clients and the charges can be quite high, in some cases the levy is actually equal to the contributions that the client invests in the pension."
As a way to try and reduce the levy on DB schemes, Smith suggests companies try to reduce the levy through their level of PPF funding and to work on reducing the risk-based element of the levy, which comprises 80% of the whole charge, by talking to Dun and Bradstreet about their “failure score”.
He says: “Companies should consider bringing their PPF funding level up to 104% as although there is no reduction in levies for having a level of 104% or higher, if it falls below this figure then you have to pay an increased charge.”
Smith adds: “For example if a company has had a good financial year they should consider submitting their accounts before December 31st so that this improved financial position can be factored into the Dun and Bradstreet calculation of their score. If there are problems with their score, companies should try meeting Dun and Bradstreet as it is not unknown for failure scores to be revised. But they should act now, as a small improvement in their score could result in the risk-based element of the levy being cut by as much as 50%.”
Alasdair Buchanan, group head of communications at Scottish Life, agrees: “We share most of these concerns, but it is usually companies, and not necessarily their advisers, who don’t fully understand how to manage liabilities inside DB arrangements. They need to benefit from some good quality advice that spells out the implications, including that closing a scheme to new members or to further accruals, does not remove the PPF liabilities.”
He adds: “The vast majority of companies have good advisers who can point out ways to reduce the risk of liabilities through the risk-based element of the levy. The biggest issue is if companies are making these decisions in isolation without advisers as that is when the problems will occur.”
If you have any comments you would like to add to this story or would like to speak to its author about a similar subject, telephone Nyree Stewart on 020 7968 4558 or email [email protected].IFAonline
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